The Retail Industry Is About To Absorb Major Costs From The New 'Chip Card' Security Overhaul

BIIThe massive Target data breach compromised the credit and debit card information of 40 million consumers and spotlighted the enormous payment card fraud problem in the U.S.

It's also drawn attention to the looming payment card security overhaul that's coming to the U.S. over the next five years, called EMV, or the "chip card" standard. For consumers, EMV will be most recognizable as a chip on credit and debit cards that works as an embedded microprocessor.

But while the new EMV standard may help reassure customers about the security of their cards, the costs of upgrading - particularly for the retail industry - will be steep, and the amount that could be saved in terms of mitigated fraud may not ultimately be worth the cost to upgrade. The EMV standard will rollout over time, and as it does, other security solutions will become available that may in fact be more secure than chip cards. Also, for the e-commerce industry in particular, a decrease in card-present fraud will most likely cause a spike in card-not-present fraud.

In a recent report from BI Intelligence we look at what the EMV standard is, how much it will cost to implement, how much it could save in terms of mitigated fraud, and whether or not the upgrade will ultimately be worth its cost. We also examine who the potential winners and losers could be in the switch over.

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Here are some of the key takeaways from the report:

• The U.S. has an enormous fraud problem. The U.S. share of fraud volume outpaces its share of payment card volume by about two-to-one. In 2012, the U.S. accounted for 47% of $11.7 billion in global payment card fraud, but only 23.5% of global card volume, according to the Nilson Report.
• We estimate that the total cost of implementing EMV in the U.S. will be about $11 billion. $7 billion of that spending will go toward upgrading to new payments terminals and software, a cost that will be largely shouldered by the retail industry.
• The benefits of the EMV standard will not be distributed evenly across the payments industry. Fraud perpetrated with counterfeit credit cards will decrease because EMV cards are more difficult to copy. But that will lead to a spike in "card-not-present fraud," as criminals move to different channels, particularly online transactions. This is a threat to e-commerce retailers.

In full, the report:

• Gives detailed breakdowns of the costs of upgrading hardware, software, ATMs, and reissuing payment cards.
• Looks at the key deadlines that payment card networks are using to pressure the industry to make the switch to EMV.
• Explores whether the card networks will be successful in getting different players in the payments space to adopt the new standard.
• Analyzes how the card networks will benefit from pushing their partners to adopt EMV, including the potential upside for mobile payments adoption.
• Includes an interview with a key EMV expert who gives us insights into what the migration will look like, why it's important to make the change, and the types of businesses that will take the longest to upgrade.
• Explains why the rollout of EMV might turn out to be a Pyrrhic victory for many of the players involved, even when the fraud cost reduction is taken into account.

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